Payroll tax for medicos: is the position now certain?
Payments made under arrangements where a service entity bills on behalf of a health professional, collects the health professional’s fees, deducts a service fee from the amount collected, and then pays on the net amount to the health professional can be treated as wages for payroll tax purposes in NSW, the ACT, Victoria and Queensland. Queensland recently released guidance on this issue, and NSW may do so soon – a recent case firms up the position taken by the various State Revenue Offices.
If you are not aware of the treatment of amounts as wages and the service entity is audited, there will be an exposure to payroll tax, penalties and interest.
A decision by the Court of Appeal of the Supreme Court of New South Wales appears to confirm the position taken by the State Revenue Offices concerning the payroll tax obligations of operators of medical, dental and allied health practices. All medical, dental and allied health practices should review their payment arrangements now, to ensure that they comply with their payroll tax obligations.
It has long been thought that the payments by medical, dental and allied health practices to healthcare providers, where structured properly, were not subject to payroll tax. However, this view has proven to be mistaken over the last 4 years, although it has been unclear whether all medical, dental and allied health practices are caught, irrespective of how they structure their arrangements.
Thomas and Naaz
The decision in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023] NSWCA 40 is the latest of a series of cases on the application of the 'relevant contract' provisions in the payroll tax laws to medical, dental and allied health practice arrangements. In the case, the Court of Appeal concluded that the 'relevant contract' provisions applied as, under the arrangement considered in the case, the medical professionals in providing services to patients were also providing services to the practice. This meant that if the practice paid the medical professional an amount (even if was their own money as it was their fees) that amount could be taxable wages for payroll tax purposes.
There were certain features of the arrangement considered by the Court that are not present in all arrangements, including contractual promises by the practitioners to attend at the premises in accordance with a roster (ordinarily, five days each week), to follow guidelines issued by the practice, to not solicit patients away from the practice's centres, and a non-compete covenant after the contract came to an end. However, it is not clear that such features were essential to the Court's conclusion.
The effect of the decision is that many medical, dental and allied health practices are likely liable for payroll tax on payments made to the health care practitioners under the ‘relevant contract’ provisions, unless one of the specific exclusions to the relevant contract provisions in the payroll tax laws applies.
The decision in Thomas and Naaz vindicates the view already held by Revenue NSW.
One aspect of the Thomas and Naaz case was that 3 doctors who worked from the practice were paid directly by patients. The payments received by these doctors were not included in the practice's taxable wages. However, this appears to be due to the manner in which Revenue NSW conducted the practice's audit, which occurred a number of years ago. The current position of Revenue NSW, as we understand from our discussions with Revenue NSW on these issues, is that Revenue NSW now considers that payments to doctors directly from patients will also be caught under the payroll tax laws where a service entity is involved, and the doctor is providing services to the service entity.
What do you need to do?
If you are a healthcare practice operator, or are a professional advisor who advises healthcare practice operators, it is important that the arrangements of all practices be reviewed urgently.
Based on our experience in engaging with Revenue NSW on these issues over the past 3 years, you can expect Revenue NSW to increase compliance activity following this decision. You should consider proactively engaging with Revenue NSW to obtain certainty as to your payroll tax position.
Contact Us
If you'd like to talk to us about any possible implications of this decision for your practice, or your business model generally, please contact our Tax Team.
The material in this article was correct at the time of publication and has been prepared for information purposes only. It should not be taken to be specific advice or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained in this article.
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